Toll Brothers, Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended April 30, 2023; comparisons are primarily with the corresponding periods ended April 30, 2022. Toll Brothers is a U.S. luxury homebuilder operating across five geographic regions: North, Mid-Atlantic, South, Mountain and Pacific.
Financial performance and position
| Metric | Three months ended April 30, 2023 | Year-over-year change | Six months ended April 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $2.507 billion | 10% | $4.287 billion | 5% |
| Home sales revenue | $2.490 billion | 14% | $4.240 billion | 9% |
| Income from operations | $425.7 million | 51% | $651.0 million | 43% |
| Net income | $320.2 million | 45% | $511.7 million | 37% |
| Diluted earnings per share | $2.85 | 54% | $4.56 | 48% |
| Operating margin | 17.0% | Up from 12.4% | 15.2% | Up from 11.2% |
| Home sales cost as a percentage of home sales revenue | 73.6% | Down from 75.9% | 73.9% | Down from 76.1% |
| SG&A as a percentage of home sales revenue | 9.1% | Down from 11.1% | 10.4% | Down from 12.1% |
Quarterly deliveries increased 4% to 2,492 homes, while the average delivered price increased 10% to approximately $999,200. Six-month deliveries were essentially flat at 4,318 homes, with the average delivered price up 10% to approximately $981,800.
Cash provided by operating activities was $145.6 million in the first six months, compared with $205.0 million of cash used in the prior-year period. Investing activities used $99.2 million, primarily for investments in unconsolidated entities and property and equipment. Financing activities used $635.3 million, including the redemption of $400.0 million of senior notes, $93.1 million of share repurchases and $46.3 million of dividends.
At April 30, 2023, cash and cash equivalents were $761.9 million, total debt book value was approximately $2.84 billion, and total stockholders’ equity was $6.42 billion. The debt-to-total-capitalization ratio was 0.31 to 1.00. The company reported approximately $1.79 billion of unused capacity under its $1.905 billion revolving credit facility, with no outstanding borrowings and $116.0 million of letters of credit.
Material changes versus the prior comparable period
- Profitability improved substantially as delivered home prices increased, sales-price increases outpaced cost increases, product and geographic mix improved, and SG&A declined 7%.
- Net contracts signed declined 19% in units and 26% in value in the quarter, and declined 35% in units and 39% in value for the six-month period. Management attributed the comparison partly to exceptionally strong prior-year demand, higher mortgage rates and increased sales incentives.
- Backlog at April 30, 2023 declined 36% in units to 7,574 homes and 28% in value to $8.38 billion versus April 30, 2022. Average backlog price increased 11% to approximately $1.106 million.
- Regional performance was strongest in the South, Mountain and Pacific regions for pretax earnings. Six-month South revenue increased 60%, while Mountain and Pacific pretax income increased 26% and 32%, respectively.
- Income from unconsolidated entities changed to a loss of $5.3 million in the quarter and $9.7 million year-to-date, compared with income of $2.9 million and $25.0 million, respectively. The prior-year six-month period included a $21.0 million joint-venture property-sale gain.
- Other income included a $27.7 million net gain on litigation settlements in the six-month period. The prior-year period included a $9.0 million gain from a bulk sale of smart-home security monitoring accounts.
- Inventory increased to $9.11 billion from $8.73 billion at October 31, 2022. Inventory and land-related impairment charges increased to $36.8 million for the six-month period from $11.2 million in the prior-year period.
Guidance, outlook, risks and unusual items
Management stated that demand improved beginning in January 2023 as mortgage rates stabilized, buyer confidence improved and resale inventory remained limited. Management expects to benefit over the long term from demographic and migration trends and a shortage of U.S. homes for sale, but stated that interest rates, consumer confidence and economic conditions make near-term demand difficult to predict. The filing does not provide specific consolidated revenue, earnings or delivery guidance.
Management believes available cash, operating cash flow, joint-venture distributions, borrowing capacity and other financing sources will be adequate for operations, commitments, debt service, share repurchases and dividends for at least the next twelve months. The mortgage warehouse agreement was extended to March 30, 2024; management intends to refinance it before maturity but cannot assure renewal on favorable terms.
- Interest-rate exposure is material. A sustained 1% increase in variable-rate interest rates would increase annual interest expense by approximately $7.5 million, before considering swaps. Swaps effectively fix the interest cost on $400.0 million of term debt through October 2025.
- Land purchase contracts totaled $4.07 billion, with $3.61 billion of additional cash required after deposits. The company also expects to purchase approximately 8,400 additional home sites from joint ventures at prices to be determined.
- The company had $334.6 million of remaining funding commitments to unconsolidated entities. Estimated maximum exposure under repayment and carry-cost guarantees was $487.6 million for debt already borrowed and $654.4 million if aggregate commitments were fully borrowed; these figures exclude recoveries, partner reimbursements, project-completion guarantees and certain indemnities.
- Warranty accruals totaled $149.4 million, including approximately $44.2 million for water-intrusion claims in Pennsylvania and Delaware. Actual repair costs and insurance recoveries could differ materially from estimates.
- Outstanding surety bonds totaled $1.14 billion, including approximately $344.2 million related to remaining community improvement work. Management does not believe the bonds or $116.0 million of letters of credit are likely to be drawn.
- The company continued implementing a new enterprise resource planning system that will be a significant component of internal control over financial reporting. Management concluded disclosure controls were effective as of April 30, 2023.
- The filing states that there were no material changes to previously disclosed risk factors and no material adverse effect expected from current ordinary-course litigation.
Important facts for investors to verify
- Whether the recent improvement in demand continues as mortgage rates, affordability and economic conditions change.
- Backlog conversion, cancellation rates, sales incentives and the effect of the 28% year-over-year backlog decline on future deliveries and revenue.
- Whether home prices continue to outpace construction-cost inflation and whether inventory impairment charges remain elevated.
- Liquidity, covenant compliance and debt maturities, including the November 2025 and November 2026 term-loan payments and senior notes maturing between November 2025 and November 2029.
- Exposure to joint-venture funding requirements, guarantees and potential project-completion or environmental obligations.
- Developments in Pennsylvania and Delaware water-intrusion claims and other warranty, construction-defect and litigation matters.
- Execution and financial-control effects associated with the ERP implementation.